- The stock market’s off to an ugly start this year.
- Stick to your strategy and remember your financial goals
The stock market rallied 5% from its lows on Monday through Thursday, only to fall more than 3% today, resulting in the second down 3% day for the S&P 500 in one week.
That’s rough.
The S&P 500 is firmly in correction territory this year, down over 12%. And technology stocks? They’re down more. Nearly half of the technology-heavy NASDAQ stocks are down at least 50% from their peaks.
Worse, those declines haven’t happened in a straight line. Instead, it’s been one discouraging failed rally after another.
If you feel mentally exhausted by it all, I get it.
But a frenetic market shouldn’t force you off your path. If your long-term goal is financial freedom, then the stock market remains one of the best ways to achieve it.
Yes, stocks could go lower. But if you sell, will you be mentally tough enough to buy when stocks eventually bottom? Heck, will you even be able to tell when that bottom happens? At the moment, it’s more likely you’ll think, “stocks will keep falling,” than “buy.”
And that’s a problem because if you miss even a few of the market’s best days, you’ll regret it.
Don’t believe me?
According to J.P. Morgan Asset Management, a $10,000 buy-and-hold investment on January 1, 2002, grew to $61,685 on Dec. 31, 2021. But if you missed the ten best days in that span, you’d only have $28,260.
Scroll to Continue
Think about that. You’d have given up 334% in cumulative return because you sold and missed the market’s best days.
Perhaps, an even better way to think about the benefits of staying the course is by looking at the S&P 500 ETF (SPY) – Get SPDR S&P 500 ETF Trust Report chart since 2007.
It felt horrible during the Great Recession, Fed-driven sell-off in 2018, and COVID-era decline in 2020, but those moments set the stage for significant stock market rallies.
Similarly, it felt horrible when the Internet bubble burst. In some ways, the nonstop appetite for high-valuation stocks, SPACs, and Meme stocks are reminiscent of the Internet boom and bust. But even if it is, investors should remember that the S&P 500 is up 326% from the end of 1999, near the Internet boom peak.
The Smart Play in the Market
Nobody knows when stocks will stop falling. Stocks follow earnings over time and earnings follow the Fed over time. Currently, the Fed’s commitment to curbing inflation means it’s raising rates and that’s a headwind to earnings, so it’s unfriendly to stocks.
However, there’s no telling when the Fed will shift gears.
Investors suffered a horrible fourth quarter in 2018 — the last time the Fed was tightening — and then, stocks rallied 29% in 2019 when the Fed switched gears. So if you sold when stocks were falling in 2018, you could very well of missed the rapid run-up.
The same is true for 2020 and 2021. Nobody knew how badly COVID-19 would impact the economy. Yet, if you sold stocks in Q1, 2020 because of COVID-19, you could’ve missed a 117% rally in the S&P 500 from its March 2020 low through December 2021.
Overall, it’s tempting to extrapolate bad times into the future, but if you’re a long-term investor, history shows investing during bear markets can pay off.
If, as Shakespeare, wrote, the past is prologue, then increasing your dollar-cost averaging contributions to retirement plans during bear markets is better than selling, and missing out on future rallies.
Source: https://www.thestreet.com/investing/crashing-stocks-what-you-should-do?puc=yahoo&cm_ven=YAHOO&yptr=yahoo